Macroeconomics Chapter 10
Aggregate Demand Curve (AD)
The curve that shows the level of real GDP purchased by consumers, businesses, government and foreigners (net exports) at different possible price levels during a time period, Ceteris Paribus
Why does the Aggregate Demand Curve slope downward to the right?
Real Balances Effect, Interest Rate effect and Net Export effect
Real Balances Effect
Consumer spend more on goods and services because lower prices make their dollars more valuable.
Interest Rate Effect
An increase in the price level increases borrowing demand and in turn higher interest rates, which discourages consumer spending.
Net Export Effect
Exports (X) decrease and imports (M) increase, which decreases real GDP through the Net Exports component (X-M).
what can cause shift in the Aggregate Demand Curve?
Government Spending (G)
Net Exports (X-M)
Aggregate Supply Curve (AS)
The curve that shows the level of real GDP produced at different price levels during a time period, Ceteris Paribus
Why is the Keynesian Aggregate Supply curve horizontal?
Because product prices and wages are fixed or rigid.
3 Ranges og Aggregate Supply Curve
Keynesian Range, Intermediate Range and Classic Range
How is Macro Equilibrium determined?
Equilibrium occurs where the Aggregate Demand Curve equals the Aggregate Supply Curve.
What is the effect of an increase in AD in the Keynesian Range of AS?
Real GDP increases while the price level remains constant.
What is the effect of an increase in AD in the Intermediate Range of AS?
Both Real GDP and the price level increase.
What is the effect of an increase in AD in the Classical Range of AS?
The price level rises while the real GDP remains at the full-employment level.
Factors that would cause a rightward shift in the AS curve
Lower Labor Cost, Lower Oil Prices, Lower Taxes and Reduced Government Regulations
A rise in the general price level resulting from an increase in the cost of production that causes the AS to shift leftward.
High unemployment and rapid inflation exist simultaneously.
A rise in the general price level resulting from an excess of total spending caused by a rightward shift in the AD curve.